Industry Report - Energy - Energy Sector Remains Hot

Energy stocks started off weak but finished strong. Energy stocks, as measured by the XLE Energy Index, declined sharply in the first half of the quarter falling as much as 16%. The second half of the quarter was a different story with the index regaining lost ground and finishing within 0.04 points, or 0.01% of where it began. Stock performance followed oil prices. WTI oil prices began the quarter at $75.23/bbl., fell to as low as $62.32/bbl., and then shot up sharply to $75.88/bbl. One would have to go back to 2014 to find higher oil prices. What's more, oil prices show no signs of letting up. Drilling rig count has started to increase, but not at a level one would expect for this oil price level. The WTI oil futures curve shows oil prices declining on the out months but staying above $74/bbl. through December. The rise in oil prices is impressive, but it pales in comparison to the jump in natural gas prices. Henry Hub gas prices rose 53% during the quarter and are now trading at a level of $5.619/mcf. One would have to go back to 2008 to find natural gas prices this high. Interestingly, the rise has come during the normally quiet summer months. The race to refill storage units that began in March has been negatively impacted by tepid drilling activity combined with high gas demand due to hot weather this summer. Natural gas future prices rise through the high-demand months of winter. The January contract, for example, trades at $5.85/mcf. The rebound in oil and natural gas prices came faster than expected and is staying higher than we would have expected. We have been adjusting our models to reflect higher prices but are maintaining our long-term oil price forecast of $50 per barrel and $2.50 per mcf. Energy companies should start reporting positive cash flow at these prices and increasing drilling budgets. Our near-term outlook for energy stocks remains positive. Wells being drilled today at current prices are generating cash flow to repay drilling costs in a matter of months, not years. We expect companies to report favorable results for the next few quarters. We recommend investor shift their attention to companies with active drilling programs and a plethora of drilling options. Read More >>

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